Hampton backs off claim that Blue Water Tobacco's books were audited

HAMPTON — The City of Hampton has backed off its prior assertion that an outside accounting firm audited the Hampton Police Division's undercover company that took in millions of dollars in a cigarette sting operation.

On Sept. 13, responding to questions about the city's financial controls over the cigarette firm's finances during its 19 months in operation, City Manager Mary Bunting wrote in an email that Blue Water Tobacco's books had been independently examined.

Police created the bogus company to catch people in the act of trafficking in bootlegged cigarettes and other crimes.

"Funds generated from and spent on the operations were audited by an outside accounting firm," Bunting wrote at the time.

When the Daily Press asked for a copy of that audit, its date, and the name of the accounting firm that performed it, Bunting said the newspaper's request would be treated as an open-records request under the Virginia Freedom of Information Act.

Over the past week, pressure to produce the audit mounted.

Several City Council members asked for the audit to shed more light on the undercover operation that was halted in January. Those council members — who annually approve the Police Division's budget — said they didn't know about the more than $718,000 in the cigarette company's account until told about it by the Daily Press last month.

On Thursday, City Attorney Cynthia Hudson said no audit had been performed.

"Our review of documents indicates that we have no documents that constitute an actual annual audit of the undercover churning operation financial transactions, as we had been advised," Hudson wrote in an email.

"What we do have (and what likely led the HPD staff to believe that an audit had been performed) was a contract with an accounting firm to train the officers on use of accounting software and money handling/tracking practices and to perform so-called 'agreed procedures' in the quarterly review and reporting of the operation's financial practices."

R. Jordan Jr.) felt he had to terminate the operation." The termination followed an officer misconduct complaint on Jan. 27 regarding officers' alleged misuse of funds and personal property.

Hudson said she would provide the Daily Press a copy of those agreed-on procedures next week.

Hampton's annual city-wide audit — which included all spending save for the money from the cigarette account — has in recent years been performed by Cherry, Bekaert & Holland, a certified public accounting firm based in Richmond. Those comprehensive reports, which can run more than 190 pages, are done for every fiscal year ending June 30.

It appears that some of the most basic financial controls that local governments and companies use to track and monitor employee spending are lacking from the financial records so far provided to the Daily Press from Blue Water Tobacco's account.

For example, the provided documents do not appear to indicate the names of anyone approving the financial transactions, from either inside or outside the department. Such approvals from supervisors are routine — particularly on travel records, for example.

Six months of monthly bank statements — June 2010 through December 2010 — are also missing from the provided records. Moreover, many of the detailed supporting receipts reflecting purchases recorded in the debit card statements have so far not been turned over.

Deputy City Attorney Steven Bond wrote in an email that he would provide more receipts to the Daily Press "as they become available," and as his office "continues to work to isolate and review responsive documents from various sources."

Bunting has said that officers "were expected" to adhere to city policies on expenditures at all times. "There was a goal from the outset to ensure that best accounting principles were followed," she wrote.

She has also said that approvals for expenditures came at "varying levels of the (Police) Division," with Jordan saying he approved some of the major expenditures while other officers signed off on "day-to-day" transactions.

She has not responded to requests about who outside the Police Division, including herself or Hampton Finance Director Karl Daughtrey, reviewed the cigarette company's expenses.

The undercover sting, which advertised cigarettes online and lured people to Hampton to buy them, was designed to crack down on black-market cigarette trafficking.

Among those crimes: people buying cigarettes in low-tax states, like Virginia, and taking them to high-tax states, such as New York, for resale. Jordan and Bunting have said the goal was also to go after gun traffickers and organized crime.

No arrests were made throughout the course of the 19-month operation, though a former prosecutor said about a half dozen charges could not proceed because some of the officers involved in the case were themselves under investigation.

More than $3 million flowed through the account during the course of the operation. Much of that money was used to continually replenish the firm's cigarette supply. But some of the money — $394,341 — was spent on new vehicles, city documents show, with sources saying some of those vehicles were unmarked SUVs.

Money also was spent on officer training trips to New York, Washington, D.C., and Las Vegas, as well as on electronics and other equipment. There are also several "cash withdrawals" — amounting to more than $12,000 — with no details given about the reason for those withdrawals.

The operation was shut down in January following the misconduct complaint involving three officers. That complaint is still being investigated.